INTERNATIONAL TRADE: WTO's Doha round staggers to a stalemate

by Colin Teese

News Weekly, September 15, 2007

We are witnessing the collapse of the Doha trade round, leaving Australia with nothing to show for it, reports Colin Teese.

The Doha Round of trade negotiations, being conducted under the umbrella of the World Trade Organization (WTO), is once again stalled. This time it might be realistic to assume that the stall is permanent. Who is to blame?

Because the US is the largest economy, its position in trade negotiations has always been critical. The US negotiator - called the United States Trade Representative (USTR) - is appointed by, and is responsible directly to, the US President.

Before the USTR gets to the negotiating table, the President must first get a mandate from the US legislature (the Congress) on the limits of concessions which the US may commit itself to. Congress still must approve or reject the finally-negotiated package, but on an all-or-nothing basis; it cannot, for example, pick and choose from parts of the negotiated package. In practice, Congress, having given the President authority to negotiate, invariably endorses the outcome.

Time limit

There are two critical elements to this procedure. First, Congress always sets a time limit on negotiations. It does not give the President an open-ended authority. And, second, none of the big players will negotiate with the US unless the US negotiators can show they have a negotiating authority from Congress. The US trading partners know that without such authority the US negotiators cannot properly speak on behalf of the US. We now know that the negotiating authority given by Congress for the Doha Round of negotiations expired on June 30, 2007.

It follows then that, even if the negotiations can be restarted, the US negotiators have no authority from the US Government to negotiate. In this circumstance, the big players - and certainly the European Union, which is an essential player if agricultural trade is to be liberalised - will not sit down and negotiate with the US. If negotiations are to be resumed, a precondition will be that the US President secures an extension of the expired mandate, or, alternatively, a new negotiating authority.

Neither of these possibilities seems likely. The old mandate was approved by a Republican-dominated Congress before the last US elections. It is unlikely in the extreme that the Democrats would endorse that old Republican mandate. Indeed, given what has happened in the US economy in the last two years, it appears that neither party any longer has an appetite for further multilateral trade liberalisation.

About this there should be no doubt. Legislation currently going through Congress aims to consolidate an even more generous program of farm subsidies. Does any of this line up with the idea of a government about to sit down with the rest of the world to consider how to reduce farm subsidy arrangements?

Of course, as most followers of US politics know, US government - at all levels, both administration and legislative - is becoming mightily suspicious of the whole idea of trade liberalisation.

Meanwhile, in the recent Japanese elections, the ruling Liberal Democratic Party (LDP) suffered huge losses in rural areas where angry farmers, opposed to a bilateral free-trade agreement with Australia, took the unthinkable step of voting for the opposition.

The mere talk of opening up Japan to Australian agricultural products - let alone via a multilateral free-trade agreement though the WTO - was enough to cost the ruling LDP its upper house majority.

With a Presidential election little more than a year away, it is feared that trade liberalisation has already led to serious job loss for US workers, and that the process is accelerating. If anything, the disposition is to seek to renegotiate some of the deals already concluded, which many leading political figures, rightly or wrongly, believe are working to the disadvantage of the US.

Notwithstanding any of this, there are those in Australia who persist in maintaining that all is not lost. However, it must be said that, even for the ideologically committed, the tune has been gradually changing.

Risk

A year or so back, it was being said that a successful outcome of Doha was vitally important to the entire world in terms of economic benefit. Various multiples of tens of billions of dollars were said to be at risk if negotiations failed. And Australian agricultural exporters would supposedly be among the biggest winners.

Then, as the likelihood of trade liberalisation in agriculture through international bargaining diminished, free-trade ideologues shifted their ground. Agricultural trade, they said, was not so important, after all. If it was holding up the possibility of important gains in other areas (for example, services trade), then agricultural trade liberalisation could be the first baby cast from the sled.

More recently, an even less ambitious tune has been sung. Maybe, after all, it was being conceded, the actual gains in economic terms were not very large at all; but still an outcome of even the most modest dimensions was absolutely essential if the entire process of international cooperation and the future of the World Trade Organization were not to be imperilled.

How can commentators put forward these views with a straight face? Are we to believe that scores of ministers and hundreds of bureaucrats have been encouraged to spend thousands of hours travelling and negotiating all over the world in pursuit of objectives which amount to little more than face-saving for an international agency? Are we, perhaps, next to be told that the signing of any document, even one with no new trade liberalisation, would be better than nothing?

The awful truth is that, quite likely, this is precisely what we are facing. If true, then the reality of the WTO will have had a short, unhappy life.

We are witnessing what might well be the collapse of a system of international cooperation that has managed the conduct of international trade flows since the end of World War II. Surely, we should be asking ourselves why. Should not those who have been responsible for turning the WTO into something it should never have become assume some responsibility for this outcome?

Bretton Woods

The General Agreement on Tariffs and Trade (GATT), out of which grew the WTO, began its life as a part of the 1944 Bretton Woods Agreements which together became the instruments through which the market economies agreed to conduct their economic life after the war.

The GATT was a set of realistic and practical terms and conditions for the conduct of international trade under which the market economies agreed to work. They were not so much binding obligations as a statement of best intentions. They even included means by which countries would try to settle trade disputes and, should dispute settlement fail, how they might behave. The system worked well for almost 60 years.

Then, suddenly, some of the big players, notably the US and the European Union, became overly ambitious. In part, they were driven by power plays, and in part by what they considered necessity. The GATT worked okay, it was conceded, but let's toughen up some of the rules and make dispute-settlement outcomes binding. (Significantly, the US was behind this latter idea which it had steadfastly opposed back in 1947!).

While we are at it, said the big players, why not add to the GATT's scope? They had obviously concluded, by the 1980s, that most of the gains they - that is, the US, Europe and Japan - had garnered from trade liberation in the goods sector had been realised. What was now needed was access to the service trade - especially in the emerging developing countries of Asia.

At the same time, it was necessary to hold the line on agricultural production and export subsidies against the output of Australia and the other agricultural exporters.

At first, it seemed to have worked. After a decade of negotiations, ending in the mid-1990s, the World Trade Organization was created with the rules-based system and dispute-settlement system made binding; and most of the developed world had committed themselves, at least nominally, to the idea of free trade. (Australia and New Zealand chose to take the idea seriously).

A start was made on some kind of agreement on services, and a few bones - later demonstrated to be illusory - were thrown to the agricultural exporters.

In the next decade or so, the whole thing started to unravel when the big players could get nowhere on a services agreement with the developing Asian countries.

This was mainly because, in the bargaining framework of the WTO, the US, the EU and Japan could offer nothing in return for what they were asking of the Asians. This was even more so following the 1997-98 Asian financial crisis.

It did not take long for the big WTO players (especially the US and the EU) to read the signs. Effectively, they bailed out of the idea of multilateral negotiations and began the selective conclusion of bilateral agreements - the so-called free-trade agreements (FTAs).

For whatever reason, the WTO tolerated this process, even though most, if not all, of the bilateral agreements breached WTO rules. All of them were selective as to the trade covered, which was not allowed for FTAs under WTO rules.

Far from enforcing binding rules, the WTO had become a gigantic filing-cabinet for a multiplicity of bilateral trade agreements which did not conform with the WTO's own rule requirements.

When all of these facts are taken into consideration, it is no wonder that international trade arrangements now seem to be drifting away from the idea of international cooperation and towards clusters of bilateral agreements.

This in turn may be leading the world away from the idea of a single multilateral system and towards the idea of regional trading blocs.

To rescue the WTO from a descent into effective irrelevancy will require a re-commitment to multilateral trade diplomacy and to the development of a set of realistic rules governing trade exchanges, such as the US displayed 60 years ago.

It might yet happen, but all the signs around us at the moment suggest quite the opposite.

Besides, even if the US were disposed to take the lead in any such project, it is doubtful if it could commit the resources necessary to make it work.

- Colin Teese is a former deputy secretary of the Department of Trade.